Global Tax Alert (News from Americas Tax Center) | 5 February 2014

Chile modifies foreign tax credit system

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On 31 January 2014, Law N° 20.727, which amends tax provisions related to the Chilean foreign tax credit system and invoice issuance, was published in the Chilean Official Gazette.

These amendments shall be applied to operations performed from calendar year 2014 onwards.

Tax credit system

In relation to foreign tax credits (FTCs), Law 20.727 increases the current FTC limits to be used in Chile (both in the presence and absence of a tax treaty), expands the foreign taxes that can be credited (beyond a foreign two tier structure) and expands the possible carryover of FTC (carry forward).

Increase of credit limit

FTC limits depend on the existence of a tax treaty between Chile and the source/residence country.

Non-Treaty country

In the absence of a tax treaty, the FTC applies to only three types of income: dividends, profits from foreign permanent establishments and royalties/technical assistance.

Under Law 20.727, the FTC limit may be claimed for a foreign income tax of up to 32% paid in relation to dividends. Previously, the FTC could only be claimed for a foreign income tax of up to 30%. The credit limit for taxes paid abroad in relation to profits from foreign permanent establishments and royalties/technical assistance remains the same.

The FTC limit related to the Chilean taxpayer´s net foreign source income is also increased from 30% to 32%.

Treaty country

The FTC applies to all types of income regulated under the respective treaty.

Law 20.727 increases the FTC limit for all types of income regulated under the respective tax treaty, allowing a FTC to be claimed for a foreign income tax of up to 35% (previously, the FTC could only be claimed for a foreign income tax of up to 30%).

The limit related to the Chilean taxpayer´s net foreign source income is increased from 30% to 35%.

The new FTC limits regarding dividends are summarized below.

Dividends
Tax Credit Limit (the lesser of)

Non-Treaty countries

Treaty countries

Taxes effectively paid abroad

Taxes effectively paid abroad

The amount resulting from applying the factor (0,32/0,68) on the net amount received from foreign source income

The amount resulting from applying the factor (0,32/0,65) on the net amount received from foreign source income

32% of the taxpayer’s Net Foreign Source Income

35% of the taxpayer’s Net Foreign Source Income

Tax credit extension

Regardless of the existence of a tax treaty, in the case of dividend distributions received by a Chilean entity, the current law allowed income taxes paid by the lower level of a foreign two tier structure to be credited (i.e., two tier limitation).

For these purposes, both entities had to be domiciled/resident in the same jurisdiction, and the foreign entity distributing the dividends to an entity in Chile had to hold at least 10% of the shares of the second level foreign company that effectively paid the income tax.

Law 20.727 eliminates the two tier limitation. Accordingly, now it is possible to credit income tax paid by an entity beyond the second tier, provided that all entities in the chain are domiciled/resident in the same jurisdiction, and that the foreign entity distributing the dividends to Chile holds at least 10% of the shares (directly or indirectly) of the foreign company that effectively paid the income tax.

Excess FTC (possibility of carryover)

When applying a tax credit for taxes paid abroad, in addition to distinguishing the type of income and the nature of taxes paid abroad, it also has been necessary to analyze whether the credit can be used against the Chilean First Category Tax, or against First Category Tax and final taxes.

In the case of a tax treaty (and for dividends in the absence of a tax treaty), taxes paid abroad can be credited against the Chilean First Category Tax and final taxes. If the amount of the taxes paid abroad is greater than the credit, or if tax losses exist in the entity receiving the respective income, such FTC excess cannot be carried forward to following years.

The FTC could only be carried forward if there was no tax treaty in place; and taxes were associated with the profits of a foreign permanent establishment or royalties/technical assistance.

Under Law 20.727, the FTC may be carried forward in all cases (regardless of the type of income and whether there is a tax treaty in place).

Electronic invoice system

Law 20.727 establishes a mandatory electronic invoice system (to be used by Chilean VAT taxpayers).

The applicability of this new compliance obligation is progressive (depending on the size of the taxpayer and its geographic location in the country among others).

The electronic system will apply not only to invoices, but also to other commercial documents such as debit notes, credit notes and bills of lading.

The electronic system´s purpose is to equalize VAT taxpayers by eliminating tax avoidance, reducing costs of the VAT system, and improving the efficiency of the VAT system. It is also expected that once implemented it will increase the IRS VAT collection.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Ltda., Santiago
  • Osiel Gonzalez
    +56 2 676 1141
    osiel.gonzalez@cl.ey.com
  • Mauricio Loy
    +56 2 676 1419
    mauricio.loy@cl.ey.com
  • Felipe Espina
    +56 2 676 1328
    felipe.espina@cl.ey.com
  • Antonio Guzmán
    +56 2 676 1316
    antonio.guzman@cl.ey.com

EYG no. CM4159